Fed lowers discount rate to calm jittery markets

Markets in North America and Europe rallied in early trading Friday after the U.S. Federal Reserve (the “Fed”) lowered its discount rate to shore up jittery credit markets.

The Fed lowered the discount rate, the rate at which it lends money to commercial banks and other depository institutions, after convening a special meeting Friday morning.

Lenders around the world have grown increasingly hesitant to extend financing in recent weeks, especially at the short end of the maturity spectrum, as losses in the U.S. subprime mortgage market have called into question the value of other types of collateral.

In a statement following this morning's meeting, Fed officials acknowledged the tighter credit environment and increased uncertainty could restrain economic growth moving forward.

While central banks around the world have injected hundreds of billions of dollars into their banking systems in recent days, global equity markets had turned sharply lower prior to the Fed's widely-applauded move Friday.

Canada's S&P/TSX composite index had fallen 4.7 per cent lower over the week ended Thursday, August 16.

Canada's materials producers led the decline. The sector fell 9.1 per cent on the week as investors worried slowing growth could limit demand for industrial metals. Copper for December delivery fell 8 per cent on the week.

As of Thursday's close, Canada's benchmark had fallen 12.1 per cent since closing at an all-time high of 14,625 on July 19. The TSX's recent retreat has eroded all but 1.1 per cent of the benchmark's 2007 gains.

South of the border, credit worries had driven the S&P 500 2.9 per cent lower, extending the benchmark's retreat to 9.1 per cent from its July 19 high and erasing all of its 2007 gain.

Countrywide Financial Corp., the largest mortgage company in the United States, led the S&P 500's Financial sector nine-tenths of a per cent lower over the week ended August 16 after analysts said creditors could force the company into insolvency. Thursday the troubled lender announced tightening credit conditions had forced it to turn to its US$11.5 billion line of credit. Countrywide shares closed 33.9 per cent lower on the week.

Figures released Thursday added to investors' anxiety, as the U.S. Commerce Department reported U.S. housing starts fell to their lowest level in ten years last month. Housing starts fell to a seasonally adjusted rate of 1.38 million in July – the lowest since January of 1997.

News from bellwether retailer Wal-Mart also weighed upon stocks this week. Wal-Mart suffered its steepest loss in five years Tuesday after the company trimmed its 2007 earnings expectations and Wal-Mart chief executive H. Lee Scott acknowledged U.S. consumers are under difficult economic pressure. Wal-Mart shares slipped 5.1 per cent on the day.

Results from home improvement retailer Home Depot also rattled investors this week. Home Depot shares tumbled to their lowest level in a year after the company said it expects the slumping U.S. housing market, recent turmoil in credit markets and higher energy prices will depress its earnings this year. Home Depot also reported its net income fell 15 per cent in the second quarter.

In Europe, credit worries drove the Dow Jones Stoxx 600 Index 5.9 per cent lower over the week ended August 16. The benchmark had declined 12 per cent since reaching a six-and-half year high on June 1.

It was a similar story in Asia this week as credit jitters dragged stocks lower. The Morgan Stanley Capital International Asia-Pacific Index, a gauge of stocks throughout Asia reported in U.S. dollars, fell 7.7 per cent while Japan's Nikkei 225 Stock Average drifted 6 per cent lower.

Meanwhile, figures released this week show growth in Japan's economy slowed to an annualized rate of 0.5 per cent in the second quarter of the year. Japan 's economy, the world's second largest, surged 3.2 per cent in the first quarter of the year.

Finally, the yield on ten-year U.S. Treasuries fell to a four-month low this week. Yields, which move inversely to prices, fell almost 20 basis points on the week as ongoing concerns in global equity markets resulted in a flight to quality.